Compound Interest Questions
Compound interest questions test your ability to work with growth over time. They appear in finance, consulting and graduate numerical reasoning tests. Here's how to tackle them.
What Is Compound Interest?
Compound interest means interest is added to the principal, and future interest is calculated on the new total. Unlike simple interest, the amount grows faster over time.
The Formula
A = P(1 + r)^n
- A = final amount
- P = principal (initial amount)
- r = interest rate per period (as decimal, e.g. 5% = 0.05)
- n = number of periods
Example
£1,000 invested at 5% annual compound interest for 3 years. What is the final amount?
- A = 1000 × (1 + 0.05)³ = 1000 × 1.157625 = £1,157.63
Simple vs Compound
Simple interest: Interest = P × r × n. Total = P + Interest.
Compound interest: Each period, the base grows. Use A = P(1 + r)^n.
Common Mistakes
- Using the wrong rate (annual vs monthly)
- Forgetting to convert percentage to decimal
- Confusing simple and compound formulas
Practice with numerical reasoning questions and the numerical reasoning test.
Frequently Asked Questions
What if the interest is compounded monthly?
Divide the annual rate by 12 for r, and multiply years by 12 for n. Example: 6% annual, monthly = r = 0.005, n = 36 for 3 years.
Do I need a calculator for compound interest?
Usually yes. (1 + r)^n can be tedious by hand. A basic calculator is typically allowed in numerical reasoning tests.
How often do compound interest questions appear?
More in finance and banking assessments. Less common in general graduate tests, but worth knowing.